He Baldwin Company Has Just Purchased 40,900,000 Of Plant
1he Baldwin Company Has Just Purchased 40900000 Of Plant And Equip
The Baldwin Company has recently acquired $40,900,000 worth of plant and equipment, which has an estimated useful life of 15 years and a salvage value of $4,090,000 at the end of that period. The task is to determine the accumulated depreciation expense for this asset after its second year of use, using FASB GAAP. This involves calculating annual depreciation expense using the straight-line method, as it is the most common approach under GAAP, and subsequently determining the accumulated depreciation after two years.
Under the straight-line depreciation method, the annual depreciation expense is computed by subtracting the salvage value from the cost of the asset, then dividing this amount by the useful life. The formula is:
Annual Depreciation Expense = (Cost of Asset - Salvage Value) / Useful Life
Substituting the provided values:
Annual Depreciation Expense = ($40,900,000 - $4,090,000) / 15 = $36,810,000 / 15 = $2,454,000
This means that each year, Baldwin recognizes $2,454,000 as depreciation expense. To find the accumulated depreciation after two years, simply multiply the annual expense by two:
Accumulated Depreciation after 2 years = $2,454,000 x 2 = $4,908,000
Therefore, the accumulated depreciation expense after the second year of use will be $4,908,000.
Regarding the subsequent questions, the effects of dividends on the company's balance sheet, the calculation of the quick ratio, the interpretation of Return on Sales (ROS), the total assets based on given balance sheet figures, the most suitable mission statement, and strategic priorities for Baldwin are explored below.
Understanding the Impact of Dividends on Financial Statements
The Chester Company's payment of $7,169,042 in dividends last year affects the financial statements primarily by decreasing retained earnings within equity. Dividends are distributions of profit to shareholders and are not considered expenses; hence, they do not increase liabilities or expenses. The correct statement is: "Net Profit will decrease $7,169,042" only if the dividends are paid out of net income, which reduces retained earnings. However, dividends do not directly decrease net profit because they are allocations of retained earnings after profit is calculated. The most accurate effect is that dividends reduce retained earnings and, consequently, total equity.
Calculating the Quick Ratio of Chester
The quick ratio offers a measure of a company's ability to meet short-term obligations with its most liquid assets. It is calculated as:
Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
Given the data lacks specific values for current liabilities, Cash, and receivables, the reported quick ratio of 2.1% (or 0.021) suggests a very low liquidity position. Hence, the answer aligns with the option: "2.1%."
Interpreting Return on Sales (ROS)
ROS is a profitability ratio indicating how much profit a company makes on its sales. An ROS of 0.08 (or 8%) means that:
There is a profit of 8 cents on each dollar of sales, indicating the company's profit efficiency.
The statement "There is an 8% profit on each dollar of sales" best describes this ratio, signifying that for every dollar in sales, the company earns 8 cents in profit.
Calculating Total Assets from Balance Sheet Data
The balance sheet shows: Total Liabilities of $51.432 million, Total Common Stock of $2.540 million, Cash of $4.020 million, and Retained Earnings of $18.537 million. The fundamental accounting equation states:
Total Assets = Total Liabilities + Shareholders' Equity
Shareholders' Equity = Common Stock + Retained Earnings = $2.540 million + $18.537 million = $21.077 million
Thus, Total Assets = $51.432 million + $21.077 million = $72.509 million
This confirms the correct total assets figure is $72.509 million.
Selecting the Most Appropriate Mission Statement for Digby
The mission statement that best encapsulates a focus on innovation, value, and high-performance products aligns with: "We create value for our customers through breakthrough designs that lead to unique high-performance products." This emphasizes innovation, customer value, and product excellence.
Strategic Priorities for Baldwin: Top Sources of Competitive Advantage
From the provided options, Baldwin's top strategic sources to gain competitive advantage include:
- Seek high automation levels
- Seek high plant utilization, even if it risks occasional small stockouts
- Add additional products
- Seek excellent product designs, high awareness, and high accessibility
- Seek the lowest price in their target market while maintaining a competitive contribution margin
These priorities emphasize operational efficiency, product innovation, market positioning, and cost leadership, aligning with Baldwin's pursuit of competitive advantage.
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